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Lord Hunt of Wirral: Having heard the Minister's explanation I am still a little confused. From the way in which I understood what he said, I believe that deleting subsections (1) and (2) of Clause 131, which is the effect of the Minister's Amendment No. 230ZA--which, I must confess, I have only just seen; indeed, I have only just received his kind letter explaining the amendment--might well have a significant impact.

The PIA currently has discretion over certain aspects of the financial resources rules. The current wording of Clause 131 allows the Financial Services Authority a similar discretion. I understood that that was causing some disquiet within certain parts of the Government. I was therefore expecting to see some amendment to Clause 131(2)(a). That is why I am troubled by the conclusive deletion of both subsections (1) and (2).

As I understand it--perhaps the Minister can assist me--capital adequacy and expenditure-based requirements will remain the same. If Clause 131(2)(a) is removed, firms with limited financial reserves whose resources fall temporarily below the £10,000 capital adequacy limit could find themselves technically in breach. That is why hitherto the PIA has exercised discretion in that area in respect of, for example, subordinated loans and contingency liabilities. There could be other areas, but I have not had time to explore those further since I have seen the Government's amendments. I wonder whether I am right in my concern that the discretion hitherto exercised by the PIA will now be taken away from the FSA. If it is, that could have a significant impact across the financial services market in the sector to which I am referring.

Lord McIntosh of Haringey: I assure the noble Lord that there is no question of the discretionary power being taken away. It is simply being transferred to Part IV of the Bill instead of occurring here. Under Part IV the principal difference, as I said, is that it allows for an application to the tribunal to be made and for it to be made even before any rule takes effect. There is the additional complication of European Union directives and their definition of what resources are. Perhaps if the noble Lord and I are meeting tomorrow or on Wednesday, as I hope that we are, we may deal with the matter then rather than take up the time of the Committee.

Lord Hunt of Wirral: I am extremely grateful to the Minister for that explanation. All I should say in passing is that Part IV deals with applications which bring into effect the whole bureaucratic process involving payments by the applicant and a whole series of administrative arrangements. I was referring to the discretionary power of the PIA which could be exercised without an application. However, as the

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Minister suggests, that is a matter on which I could perhaps reflect further in the light of his helpful comments.

Lord McIntosh of Haringey: If we were to meet, I could write a note at the meeting and send it to all noble Lords taking part in the Committee proceedings.

Lord Hunt of Wirral: I am grateful to the Minister.

Lord Kingsland: Having heard the Minister's explanation of his amendment, I can confidently say on behalf of the Opposition that it satisfies the problem which concerned us. In those circumstances, there will be no need for us to press our amendment.

On Question, amendment agreed to.

5.15 p.m.

Lord McIntosh of Haringey moved Amendment No. 229:

    Page 60, line 35, at end insert--

("(7) "Consumers" means persons--
(a) who use, have used, or are or may be contemplating using, any of the services provided by--
(i) authorised persons in carrying on regulated activities; or
(ii) persons acting as appointed representatives; or
(b) who have rights or interests which--
(i) are derived from, or are otherwise attributable to, or
(ii) may be adversely affected by,
the use of any such services by other persons.
(8) If an authorised person is carrying on a regulated activity in his capacity as a trustee, the persons who are, have been or may be beneficiaries of the trust are to be treated as persons who use, have used or are or may be contemplating using services provided by the authorised person in his carrying on of that activity.
(9) For the purposes of subsection (7) a person who deals with an authorised person in the course of the authorised person's carrying on of a regulated activity is to be treated as using services provided by the authorised person in carrying on those activities.").

The noble Lord said: I beg to move.

[Amendment No. 229A, as an amendment to Amendment No. 229, not moved.]

On Question, Amendment No. 229 agreed to.

Clause 129, as amended, agreed to.

Lord Joffe moved Amendment No. 230:

    After Clause 129, insert the following new clause--


(". The Authority shall make rules requiring an authorised person who has permission to carry on a regulated life assurance activity to consult and account to with-profits policyholders for--
(a) any appropriation of reserves or surplus assets to shareholders, and
(b) decisions on the application or investment of assets or reserves which could adversely affect the rights of such policyholders.").

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The noble Lord said: I declare an interest in that my family and I are with-profit policyholders in proprietary life insurance companies. The purpose of the amendment is to help protect the interests of with-profit policyholders in proprietary life insurance companies. Policyholders, while notionally owning the majority of assets in many life insurance companies, are normally not represented, consulted or even informed when decisions which could affect their best interests are taken by the directors. That is because the boards of such companies are elected by and legally accountable to their shareholders but not to their policyholders.

However, shareholders' interests do not always coincide with those of policyholders. Where such conflicts arise, boards of directors tend to focus on the interests of the shareholders who elect them. That is an entirely unsatisfactory state of affairs, aggravated by the fact that decisions taken by the boards are generally taken in secret and without any prior consultation with policyholders. There is not even a mechanism by which policyholders can obtain information on issues which are of vital importance to them.

The system is a model of opaqueness and lack of transparency. I shall seek to illustrate that claim by reference to a number of decisions taken by the Prudential insurance company. In so doing, I am not suggesting that that company is behaving differently from other companies in a similar position, nor am I seeking to impugn personally any of its directors.

The Prudential, as a result of the mis-selling of personal pensions, was obliged to pay compensation in the amount of approximately £2 billion to policyholders who had been mis-sold pensions. In order to find the resources to pay the compensation, it decided to utilise for the purpose what is variously known as its orphan estate, inherited estate or surplus assets.

The orphan estate does not, as may be imagined, consist solely of assets arising from unclaimed policy proceeds but rather more from surplus reserves arising from a number of sources, including in most cases underpayment of bonuses to previous generations of policyholders.

It is by no means clear who owns the orphan estate but many, including a number of actuaries, believe that policyholders might have the most valid claim to some or all of it. In practice, the Prudential may have appropriated resources arguably belonging to policyholders to pay for losses which policyholders, if they had been consulted, which they were not, could well contend had nothing whatever to do with them and should have been entirely borne by the shareholders who, after all, had elected the directors but failed to control their salespeople. Indeed, the views of policyholders on that issue may well be influenced by the findings of the Treasury Select Committee in its 9th report in 1998, paragraph 32 of which reads,

    "The shareholders, who benefit from the profitability of the company, have a responsibility and should bear a substantial share of the loss from pensions mis-selling".

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On that matter we concur with the judgment of the Consumers' Association that placing responsibility on shareholders will encourage better management in future.

In making the decision to pay the compensation for mis-selling out of the orphan estate, which incidentally was approved by the Treasury, neither the Prudential board nor the Treasury consulted policyholders nor, apparently, even considered the question of accountability. After all, if £2 billion of a company's assets have been lost, somebody must be accountable. At the very minimum, policyholders whose money it may have been, or who may have been prejudiced by its loss, should have been informed of why the mis-selling was not prevented and who was responsible so that they could take any action they felt appropriate.

However, there is a further interesting twist. The Prudential's orphan estate, even allowing for the depletion of the £2 billion paid to policyholders who had been mis-sold, will still have within it a balance of approximately £5 billion. The board of the Prudential decided that it would like to reallocate the orphan estate.

It is by no means clear to policyholders what precisely is intended by the board or the reasons for their new-found interest in clarifying the position relating to the orphan estate. However, policyholders may well speculate that the purpose of the reallocation is more to do with enhancing shareholder value than benefiting policyholders. Does the Prudential intend to appropriate the whole of the orphan estate to shareholders, 10 per cent, or some intermediate figure? The policyholders certainly have no idea. The Prudential has been locked in negotiations with the Treasury for several years. Policyholders have been unable to extract any information on what the Prudential would like to do with the £5 billion, give or take a couple of billion.

The response to all questions to the Prudential and the Treasury is that it is price-sensitive information for shareholders, but it apparently occurs to no one that it is vital information to policyholders who might want to block any appropriation they consider contrary to their interests.

It is also instructive to note that the Prudential, the United Kingdom's mightiest insurance company, appears to make little or no effort to communicate with its policyholders. Its annual reports are replete with references to maximising shareholder value, but I could find nothing in its recent reports about maximising policyholder value or, indeed, virtually any reference whatever to policyholders. Based solely on its annual reports, one could be forgiven for concluding that policyholders might be an extinct species.

I am pleased to say that there is, however, potentially some good news for policyholders on at least one issue. In my discussions with the Prudential it emerged that at long last the industry is planning actively to address the communications issue through a new project called "Project Salter" headed by Sandy Leech, chief executive of Zenith Life and chair of the

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Association of British Insurers. Although that initiative is to be welcomed, it is a voluntary code that is proposed. We all know, based on previous experience, that voluntary codes in the life assurance industry are disregarded by many of its members and that the standards which voluntary codes set tend to be watered down to the lowest common denominator in order to attract comprehensive industry support.

Nevertheless, I urge the Government strongly to support the Salter initiative, provided that it sets high standards, is universally agreed to by the industry, and meets its timetable of setting standards by June this year and implementation in the first half of next year.

I submit that the failure of companies to consult with, and account to, their policyholders is an untenable situation and that in the Bill, one of the objectives of which is the protection of consumers, steps should be taken to ensure that companies consult with and inform policyholders about issues which may affect their best interests.

In the draft regulations just published relating to stakeholder pensions, the Government have insisted on ring-fencing with-profits funds because of their opaqueness and have called for greater transparency. That is what the amendment also seeks to achieve for with-profits policyholders. The draft regulations also set standards for product design and communication with policyholders which could serve as a model for the Salter initiative and for the implementation of the resolution I propose.

I should also like to draw attention to the relevant precedent in relation to pension funds in which the rights of pensioners are protected through direct representation on pension trustee boards. The most effective protection afforded to policyholders would be for direct representation on the boards of life assurance companies, which I hope Government will soon require. However, I appreciate that to move such an amendment at this stage would be inappropriate. Instead, the amendment I propose should be seen as a first step towards protecting the rights of policyholders. I beg to move.

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